Aggregate Demand, Harrod’s Instability and Fluctuations

Abstract

Long-run analyses usually stress the leading role of aggregate supply. As a result, aggregate demand is supposed to adjust in order to accommodate supply changes. In a medium-run perspective, however, both aggregate demand and supply forces must be taken into account. In this case, the stability of the model cannot be taken for granted. The objective of the present paper is to study the dynamics generated by both forces within a Harrodian framework. Two main results are obtained. On one hand, the instability property of the model is illustrated. On the other, the introduction of some nonlinearities can constrain instability. The role of the rate of interest and the nature of the expectations in obtaining these results is stressed.